The Affordable Mortgage Depression

Survey: The National Homeownership Strategy

Whitney Ross — Sun, 07 Mar 2010 17:55:00 GMT

Do you know what The National Homeownership Strategy (NHS) is?

Link to Survey

Survey results and article on the NHS to follow.

The Bureau of Labor Statistics Shuffles Deck Chairs While the Economy Sinks

Whitney Ross — Sat, 06 Mar 2010 18:02:00 GMT

As reported in the February Employment Situation Summary the Unemployment Rate remained unchanged at 9.7%. This is interpreted as good news for the economy and the purported recovery. Further analysis of the data provides perspective.

Total nonfarm payroll employment declined 36,000 from January. Job losses continued in construction and information, while employment continued to increase in temporary help services. The DOL considers construction and information workers who lose their jobs but find work at temporary help services as employed.

The number of persons working part time for economic reasons (involuntary part-time workers) increased by 475,000 in one month from 8.3 to 8.8 million. This impressive increase is ignored by the Unemployment Rate.

About 2.5 million persons were marginally attached to the labor force in February, an increase of 476,000 from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. (Imagine if they all look for work in March!)

The number of Discouraged Workers who have given up hope of finding employment increased by 139,000 from January (figures are not seasonally adjusted).

The Unemployment Rate continues to be a preferred metric for assertions of an economic recovery. But this statistic grossly understates what is transpiring within the economy, the changing disposition of the work force and ignores large numbers of people who have become so discouraged they quit looking.

It is a perversion that the Unemployment Rate is touted as improving when desperate people are forced into part-time positions or become so dejected they stop searching. The real employment environment continues to erode and no amount of protestations to the contrary will change this reality.

Portrait of a Failed Attempt to Prop Up Housing Prices

Whitney Ross — Thu, 04 Mar 2010 03:17:00 GMT

Housing Sales “Unexpectedly” Collapse Providing Institutional Economists an Education in Economics and Common Sense

Whitney Ross — Mon, 01 Mar 2010 14:12:00 GMT

Both new and used home sales “unexpectedly” fell below economists’ expectations in January declining by record amounts. This follows on the heels of the previous record-setting decline in December.

Below are excerpts from two Bloomberg articles this past week which reported the sales figures:

Feb. 24 (Bloomberg) -- Sales of new homes in the U.S. unexpectedly fell in January to the lowest level on record, a sign that an extension of a government tax credit may not be enough to rekindle demand.

Purchases declined 11 percent to an annual pace of 309,000, below the lowest forecast in a Bloomberg News survey of economists, figures from the Commerce Department showed today in Washington. The median sales price dropped 2.4 percent from January 2009 and the supply of unsold homes increased.

Feb. 26 (Bloomberg) -- Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market.

The decline to an annual pace of 5.05 million, reported today by the National Association of Realtors in Washington, was the second-largest on record after December’s 16.2 percent plunge.

A federal tax credit for home buyers is showing few signs of providing the lift that it did late last year, when purchases surged in November to the highest level since 2007.

The Blind Leading the Blind

In February 2009 Congress passed an $8,000 tax credit for first-time homebuyers which was set to expire in November 2009. This extraordinary act of housing market intervention made it inevitable that home sales would collapse following the program’s stated termination date.

Policy makers, oblivious to reality, extended the tax subsidy on the eve of its expiration in hope of maintaining artificially elevated sales volumes which resulted from the $8,000 benefit.

Congress is driven by political expediency. Institutional economists have no such excuse. Four and a half years into the Housing Collapse economists continue to demonstrate an inability to anticipate dynamic but inevitable events.

This is apparently the curse of academic prognosticators who rely on backward looking econometric tools to formulate future expectations. Anytime the trend-line changes direction “economists’ expectations” will invariably be wrong. This phenomenon is fascinating because the incentives which drive the change of direction are well understood and largely common sense.

The Impact of Subsidizing Home Purchases for a Finite Period of Time

Over the last several years potential home-buyers postponed transactions due to falling prices, economic uncertainty and a lack of access to credit. The $8,000 tax benefit had the effect of catalyzing pent up demand for houses. It also established a financial incentive which moved future purchases forward into 2009. Why buy a home in January 2010 when an $8,000 tax benefit is available to do so two months earlier?

It matters not that the credit was extended by Congress at the last moment. For 10 months potential homebuyers behaved under the assumption that it would expire in November. There is no longer pent-up demand amongst first-time homebuyers and there are now fewer potential owners in the market. Congress’ extension of the policy had no chance of maintaining the sales volume distortion as the program’s benefit had largely been exhausted. Certainly some number of transactions which would have taken place in 2011 will be pulled forward into 2010, but to no productive end.

The Government’s strategy in dealing with the Housing Collapse and broader Depression has been consistent. Policy makers continue to interfere in the private sector in ways which are unsustainable but create short-lived economic distortions which establish the fleeting impression of stability or recovery. In pursuing this strategy our misguided politicians only succeed in postponing a resolution to the downturn and worsening our economic predicament.

Dismal Reality

The only thing surprising about January’s sales figures is that economists didn’t expect a collapse following the planned termination date of a program which paid people to buy houses. Did none of these economists pay attention to Cash-For-Clunkers?

TheAffordableMortgageDepression.com continues to observe that distortive Government interference in the housing market is unsustainable and will fail. With respect to the “Cash-For-Condos” scheme, TheAMD.com has consistently projected a collapse in sales volumes and a resulting decline in prices.

7/29/2009 - The Most Interesting Housing Event Since Prices Began to Decline in 2006

10/5/09 - A Practical Lesson in “Recoveries” Which Are Predicated Upon Subsidized Consumer Spending

11/23/09 - Housing Prices Continue to Plummet Despite Extraordinary Government Intervention

1/21/10 - Why Housing Prices Will Resume Collapse in 2010

1/25/10 - As Expected, Existing Home Sales Collapsed Following the Zenith of "Cash-For-Condos"

What Happens Next?

I pose the following question for anyone interested in the economics driving The Affordable Mortgage Depression. What happens to prices when new home sales fall to the lowest level on record and existing home transactions register their second-largest decline ever?

If you are an institutional economist and require a hint: It does not bode well for housing prices or the Government’s failed attempt to prop them up.

Explanation of Case-Shiller Monthly Analysis Methodology

Whitney Ross — Wed, 24 Feb 2010 04:58:00 GMT

TheAffordableMortgageDepression.com employs a tool for analyzing monthly Case-Shiller data in the context of the Housing Bubble. The following is an explanation of the methodology employed.

Introduction

In 1994 the Clinton Administration launched an initiative designated “The National Homeownership Strategy” (“NHS”). This undertaking was the most comprehensive and transformative housing public policy in U.S. history.

“The purpose of The National Homeownership Strategy (was) to achieve an all-time high level of homeownership in America within the next 6 years through an unprecedented collaboration of public and private housing industry organizations.” - U.S. Department of Housing and Urban Development, May 1995

The goal was to generate 8 million additional homeowners by year-end 2000 and in doing so increase the rate of homeownership from 63.8% to a record 67.5%.

Implementation

The NHS combined executive, legislative and regulatory mandates and was executed at the national, state and local level. Many tools were employed in this coordinated effort including:

The Riegal-Neal Act of 1994 which limited interstate operations of banks not in compliance with the Community Reinvestment Act
Revisions to the Community Reinvestment Act in 1994 and 1995 which directed lenders to make loans to people who could not otherwise qualify for them based on merit
The reallocation of Fannie Mae and Freddie Mac resources into subprime mortgages. This HUD directive established a large and growing source of capital to finance subprime loans and created a lucrative opportunity for the fee-based, mortgage origination industry
The use of Government Sponsored Entities (GSEs) and banking regulators to pressure lenders into meeting subprime lending goals

The National Homeownership Strategy succeeded in realizing record homeownership gains, but in doing so it created The Housing Bubble and a decade long economic distortion.

The Housing Bubble's Origin

Immediately upon implementation of the NHS, The Homeownership Bubble began.

Increased access to subsidized credit with generous terms caused demand for houses to expand, transaction volumes to rise and inventories of "for sale" properties to tighten. Mortgage characteristics which properly align the incentives of buyers and act to restrain prices were reduced or eliminated. These first-generation Affordable Mortgages functionally desensitized buyers to price. As a result, home values began to rise nationally at an unsustainable pace in 1997; two years after homeownership rates started their precipitous climb.

Framework for Analyzing Monthly Case-Shiller Data

Since housing prices began to decouple from the fundamentals of value in 1997, it makes sense to analyze current prices relative to the sustainable valuations which existed before the distortion. Calculating what 1997 home values would be today, adjusted only for inflation, provides an interesting perspective on how much farther prices might be expected to fall.

Pre-bubble housing valuations are adjusted for inflation in an attempt to estimate an undistorted, fair value. It is logical to expect that home prices appreciate in kind with inflation as the cost of housing inputs, including materials, labor and land, fluctuate with consumer price changes. Excess housing appreciation inevitably leads profit-seeking builders to increase supply (as we experienced during The Bubble), regulating prices at roughly the rate of inflation. In fact, several hundred years of housing data clearly establishes this relationship between home values and the rate of consumer price changes.

Qualifying Inflation-Adjusted "Fair Value"

Most of the factors which determine housing market prices are far less favorable today than they were in 1997. The supply of homes is larger on a per capita basis, inventories of "for sale" properties are higher, credit availability is restrained, perceived risk is increased, expectations for future price performance are more subdued, private sector subprime loans are largely extinct, effective mortgage rates are higher (relative to adjustable rate loans) and the primary mechanism which supported unsustainable valuations, Affordable Mortgage characteristics, are no longer available. As such, a reasonable person might argue that the fair value of housing on an inflation-adjusted basis is less than it was in 1997.

Link to Case-Shiller Analyses

Case-Shiller December Price Index Analysis

Whitney Ross — Wed, 24 Feb 2010 04:58:00 GMT

Explanation of Case-Shiller Analytical Methodology

The One Year Anniversary of The Stimulus Spending Bill

Whitney Ross — Thu, 18 Feb 2010 02:05:00 GMT

TheAffordableMortgageDepression.com has observed for more than a year that the Stimulus Spending Bill could not work and would not achieve its stated employment goals.

"Debt-financed, government-directed, infrastructure spending will not stabilize the economy nor will it be helpful in extricating ourselves from the impending depression. This crisis is being driven by deflating asset prices, excessive debt, shrinking credit availability and collapsing consumer spending. Inefficient federal projects which provide little incremental economic value will have no effect on the perpetuators of the malaise." - 12/7/08

12/7/08 - Repeating A Great Depression Era Mistake
2/10/09 - The Stimulus Bill, Like All Government Interference To Date, Will Fail
5/8/09 - The Stimulus Spending Delusion

The following is a chart which updates actual unemployment rates relative to those purported to result if The Stimulus Spending Bill was adopted.

The unemployment rate was 9.7% in January, 2.7% above the level which the Obama Administration argued would result by year-end 2010 if the Stimulus Spending plan was implemented.

As stated on 5/8/09:

“In only a few months it should be evident to all intellectually honest people that the Stimulus Bill was an ineffective, waste of money relative to the professed benefit of such spending. Taking into account that we will be in debt by an additional $787 billion, which will act to restrain future economic activity, and the Stimulus Bill may represent the most egregious waste of money in U.S. history.”

The War Against the Poor: Change in Unemployment Rates by Income Level

Whitney Ross — Tue, 16 Feb 2010 04:31:00 GMT

Source: Data from Time article based on Center For Labor Market Studies analysis.

When Exactly, Precisely Did The Housing Bubble Begin? Part II: Home Prices

Whitney Ross — Mon, 15 Feb 2010 02:37:00 GMT

Part I: Homeownership

When Exactly, Precisely Did the Housing Bubble Begin? Part I: Homeownership

Whitney Ross — Wed, 10 Feb 2010 17:13:00 GMT

Link to explanation of what caused the Homeownership Bubble.

The Mortgage Bankers Association Demonstrates Its Lack of Real Estate Market Understanding

Whitney Ross — Tue, 09 Feb 2010 16:58:00 GMT

There was an interesting article in the February 8th edition of the Wall Street Journal regarding the Mortgage Bankers Association (MBA) entitled “Mortgage Group In Property Pinch”.

The MBA is a national organization of real estate finance professionals. They are a sophisticated operation that performs excellent research, but not surprisingly are also unapologetic real estate cheerleaders.

According to the article in 2007 the MBA purchased its headquarters, at the top of the commercial real estate bubble, for $79 million. At the time the trade group issued the statement: “We have come to the inescapable conclusion that owning our own building was the smartest long-term investment for the association”.

Last week the group agreed to sell the building for $41.3 million, well below the purchase price and the amount borrowed to finance the acquisition (speculated to be $75 million). This shocking 48% decline in the value of MBA’s investment in less than 3 years demonstrates a difficult to rationalize lack of real estate market understanding by purported real estate experts.

By putting their money where their mouth was the MBA has at least suffered the same fate as homebuyers who followed the group’s advice to invest in housing. Now the MBA is navigating the equivalent of a short sale while millions of Americans endure similar transactions.

Of course the MBA is walking away from its mortgage while encouraging millions of underwater homeowners to continue to service their obligations. The group called its decision “economically prudent”. Why wouldn’t it be equally prudent for underwater homeowners to abandon their properties? Instead the MBA continues to promote failed Federal efforts to mitigate foreclosures.

Such a humbling event might be cause for introspection by the MBA. The organization lists on its web-site two of its primary goals as “expanding homeownership and extending access to affordable housing to all Americans”. It was precisely the Government’s pursuit of these two agendas during the 1990s which created and gestated the largest bubble in history. It may be time for the MBA to reevaluate its priorities and recommendations based on its demonstrated lack of real estate investment sophistication.

Economic Contra-Indicator Hank Fishkind is Close to Extending his Extraordinary Record of Soothsaying Ineptitude to Seven Straight Years!

Whitney Ross — Mon, 08 Feb 2010 04:22:00 GMT

We are two and a half months into Hank Fishkind’s latest prediction of economic recovery. Mr. Fishkind, a Florida-based economist and unintentional comedian, has assembled an impressive record misdiagnosing the Housing Market and underestimating the damage caused by its collapse over the past six years. His latest blunder, a prediction that the Recession would end on November 14th based on a decline in unemployment claims to 350,000 per week, was “icing on the cake” for Fishkind’s wretched 2009.

The Affordable Mortgage Depression framework of economic understanding enabled the prediction that Mr. Fishkind’s November prognostication would be wrong. Based on this understanding, should the Government manipulate weekly unemployment claims down to 350,000, that figure would be irrelevant in confirming a sustainable recovery as long as undistorted economic fundamentals continue to erode.

The question at hand is whether Fishkind can extend his remarkable record into 2010? Fortunately we don’t have to wait much longer to find out. Hank waffled on his prediction of a November recover when he originally issued it in June 2009. The bold statement included the caveat that it might not be realized for “six months one way or the other”. We are two-thirds through this yawning 12 month window and rapidly approaching Fishkind’s May 2010 deadline.

Few forces in nature are as consistent as Mr. Fishkind, so the only mystery that remains is how much longer news sources will continue to lend credence to Hank’s “economic expertise”?

(Links which highlight Mr. Fishkind’s track record)

The Department of Labor Plays a Game of “One of These Things is Not Like the Other”

Whitney Ross — Fri, 05 Feb 2010 23:55:00 GMT

The following are three sets of employment data released by the Government for January:

1. The economy lost 20,000 jobs

2. Weekly first-time unemployment claims were high (consistent with net job losses) and rising. See chart:

3. The Unemployment Rate fell from 10.0% in December to 9.7% in January

There are only a few possibilities which explain these disparate trends:

Errors within the Department of Labor’s surveying results
A flaw in the methodology used to calculate the Unemployment Rate
Overt manipulation of the data

Overt manipulation may not be proven based on an analysis of released data. I do note that:

The Government does not count out of work Americans who have become discouraged and quit looking for a job as “Unemployed”. As such, the greater the number of people who quit looking for work the more the Unemployment Rate improves.

According to a revision in today’s report, from March 2008 to April 2009 1.2 million more jobs were lost than had been previously reported by the Bureau of Labor Statistics. This may be the largest such revision in U.S. history. The error is extraordinary and it is difficult to believe that it results solely from incompetence alone.

An interesting observation: The U.S. economy has lost 3.3 million jobs since the Stimulus Spending Bill was implemented at a deficit-financed cost of $787 billion.

The Federal Reserve, FDIC and Bank Regulators Ignored Repeated Warnings of a Housing Crash Going Back to 2005

Whitney Ross — Thu, 04 Feb 2010 20:22:00 GMT

The following is an excerpted introduction from and link to an extraordinary article by Elizabeth MacDonald of Fox Business.

The horrors detailed in the piece are difficult to read following Ben Bernanke's reconfirmation as Chairman of the Federal Reserve last week.  The analysis is a worthwhile read which describes the institutional failure of the entities and individuals we trusted to keep our banking and mortgage systems solvent. It demonstrates the absurdity of continuing to rely on these individuals/institutions to navigate us out of the present malaise when each has repeatedly demonstrated for years a lack of understanding of the fundamental problems afflicting our economy.

Housing Red Flags Ignored
February 2nd, 2010

One of the nation’s biggest mortgage industry players repeatedly warned the Federal Reserve, the Federal Deposit Insurance Corp. and other bank regulators during the housing bubble that the U.S. faced an imminent housing crash.

The trade group also mapped out the 15 states which faced "sudden increases in foreclosures" and "a downward spiral," including California, Florida and Nevada.

But bank regulators not only ignored the group's warnings, top Fed officials also went on the airwaves to say the economy was "building on a sturdy foundation" and a housing crash was "unlikely."

The letters, obtained by Fox Business, were sent in 2005 and 2006 before the housing bubble burst.

As it pleaded with bank regulators to stop subprime lending abuses, the Mortgage Insurance Companies of America [MICA] pointed out the red flags in analysis from the bank regulators' own staffers as well as the likes of Bear Stearns and Lehman Brothers, three years before these two Wall Street giants collapsed under the weight of bad mortgage bets.

But the fact that these lengthy warnings did not compel bank regulators to act raises serious policy questions for Congress and the White House, as they move to make the Federal Reserve the systemic risk regulator, when the Fed didn’t act to stop the biggest systemic risk of all.

The new revelations also may make it harder for Federal Reserve chairman Ben Bernanke to battle Congressional curbs on the Fed's authority over the banking system, and moves by members of Congress to have the Fed’s monetary policies audited.

Continued via link...

Excerpted section detailing Ben Bernanke's gross incompetence:

Bernanke Ignores Growing Problem

July 1, 2005: Bernanke, then President George W. Bush's Chairman of the Council of Economic Advisers, to CNBC: “…unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong…I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

CNBC: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’

Bernanke: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

February 15, 2006: Bernanke said: "Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise, but not at the pace that they had been rising. So we expect the housing market to cool, but not to change very sharply…The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy."

January 2007: Bernanke speech before the American Economic Association in whereby he said “to make crises less likely over the years, the Federal Reserve has worked effectively with the Congress, other supervisors, and financial market participants to develop statutory regulatory and other measures.”

March 28, 2007: Chairman Bernanke said: “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

May 17, 2007: Chairman Bernanke said: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

February 27, 2008: Chairman Bernanke said: "By later this year, housing will stop being such a big drag directly on GDP…I am satisfied with the general approach that we’re currently taking."

February 28, 2008: Chairman Bernanke said: “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.”

July 16, 2008: Chairman Bernanke said that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Since then, Fannie Mae and Freddie Mac have received the largest taxpayer bailout and have been taken over by the federal government.

Putting the Housing Crash in Perspective with an Analysis of the Case-Shiller November Data

Whitney Ross — Thu, 04 Feb 2010 00:41:00 GMT

The Case-Shiller 10-City Index remains 33% above inflation-adjusted, pre-bubble levels. Seven out of 19 scrutinized markets remain overvalued by at least 31.5% relative to the 1997 base value. Los Angeles wins the prize in November 2009 as the most overvalued market within the Case-Shiller Index at 140.8% of inflation-adjusted, fair value.

Housing prices remain materially overvalued. Recent failed efforts to prop up home values have only delayed the inevitable. These efforts have lengthened the duration of the collapse and likely deepened its eventual trough by creating an incremental source of foreclosures and collateral economic damage.

(Case-Shiller 10-City House Price Index)

What Happens When Consumer Behavior is Distorted by Government Subsidies? A Case Study Which Bodes Poorly for Housing.

Whitney Ross — Wed, 03 Feb 2010 04:17:00 GMT

The following is an article from Cars.com posted January 22, 2010. (direct link)

Clunkers Quotient: Some Regrets, Late Payments

Higher credit risk buyers who bought a car using the Cash for Clunkers incentive last year have higher repossession and late payment rates and higher levels of buyer's remorse than buyers who did not use the program, according to CNW Research.

Those in the lowest credit category had a 4.8% repossession rate compared with those who bought similar vehicles without using Cash for Clunkers, which stands at only 2.2%. CNW could not discern if buyers in higher credit categories also have higher repossession or late payment rates.

When it comes to regretting a purchase, one in five who used the government’s $4,500 incentive said they now wish they hadn’t. The buyer's remorse rate for non-Clunkers buyers was one in 20.

It makes sense that more subprime borrowers would have difficulty making their payments. The regret could also be attributed to people who bought vehicles but have yet to see better jobs or wages materialize in a still-sluggish economy.

Dismal Reality

When individuals are paid by the Government to buy things, bad consumption decisions are made. When prices are distorted by politicians, inefficient outcomes always result. People who would not otherwise have purchased a car or home do so because of the perception of "free money" or a "one-time bargain".

A similar phenomenon is assuredly occurring within the housing market. First-time homebuyers who were enticed to purchase overvalued houses with the Government's $8,000 tax credit will default in higher numbers and experience buyer's remorse as falling prices overwhelm the benefit of Congressional subsidies.

Cash-For-Clunkers was a disaster which cost tax payers $24,000 per incremental car sale and produced the negative distortions highlighted in the article above. "Cash-For-Condos" combined with Fed subsidized mortgage interest rates, and 3.5% down payment FHA loans will have a much worse effect. Buyer's regret will certainly surpass that created by Cash-for-Clunkers as houses are more expensive, overvalued, purchased in highly leveraged transactions and rapidly declining in price. As scant equity evaporates and mortgages sink further underwater this regret will transform itself into an incremental stream of Government created defaults and foreclosures. As has been stated on this blog since October 2nd of 2008:

"Any action (by the Government) which would attempt or have the effect to prop up housing prices at an artificial value is counterproductive. Such initiatives will only lengthen, deepen and increase the damage caused by the inevitable march to a sustainable (price) equilibrium." (link)

A Stark Portrait of Government Excess and Fiscal Irresponsibility

Whitney Ross — Mon, 01 Feb 2010 17:29:00 GMT

Today the President unveiled a new spending plan for 2010 and beyond. If adopted this Administration will have assured itself a dubious distinction as the most fiscally irresponsible in U.S. history. The proposed, reckless behavior directly threatens the nation's solvency.

The following chart places the current and proposed budget deficits into context.

A Pivotal Event in the History of American Labor

Whitney Ross — Mon, 01 Feb 2010 01:03:00 GMT

Total union membership has been declining steadily since the 1950s .

For the first time in U.S. history more public sector employees (7.9 million) belong to a union than do private sector employees (7.4 million), despite there being 5 times as many workers in the private sector.

This pivotal event in the history of American labor results from consistent and disparate trends. The percentage of total and private sector workers who are members of a union has been declining steadily.

But the percentage of Government employees affiliated with unions has been static and rising modestly for decades.

Commentary on the economic and political forces driving these starkly different trends is to follow.

Why Not Manufacture 20% GDP Growth in 2010?

Whitney Ross — Fri, 29 Jan 2010 17:11:00 GMT

It was announced today that 4th quarter GDP grew by 5.7% exceeding economists’ expectations of 4.8%. Of course GDP for 2009 actually fell by 2.4% representing the largest annual decline since 1946 but that was a vestige of the nasty, old, antiquated, private-sector economy.

This spectacular expansion is wonderful news right? We are experiencing the fastest growing economy in more than 6 years. Surely the Great Recession is over now? We can expect unemployment to improve rapidly, the deficit to shrink, housing prices to rise, credit to increase and a return to prosperity?

This is the problem with Government mandated, deficit-financed GDP growth driven by stimulus that is inappropriate relative to the fundamental forces which are undermining the economy.

The US Government has the ability to artificially manufacture arbitrary GDP growth anytime it wants. The nation has a unique ability to borrow money based on our historical credit-worthiness and productivity. This capacity for debt accumulation allows the Government the option to spend more money than it collects in revenues.

Despite extraordinary stimulus we have high and rising unemployment, housing prices are falling and credit availability is contracting. If 5.7% GDP growth manufactured by Government edict is a good thing, why not create GDP growth of 20% in 2010?

"Let Them Wear Snuggies!"

2009 GDP was $14.5 trillion. The Government could borrow $2.0 trillion and spend it on Snuggies, Perfect Brownie Bake Pans, Ab Circle Pros and commemorative Barack Obama bobblehead dolls for all Americans. These expenditures would trickle through the economy as infomercial product manufacturers nationwide reap and spend windfall profits from the Government purchases.   It would be relatively easy to grow 2010 GDP by $2.9 trillion.

The obvious problem being that this GDP growth is not real, sustainable or productive and creates liabilities which are economically debilitating.

$2.0 trillion in new debt would need to be serviced annually and eventually repaid. Future economic growth and job creation would be directly restrained by the new debt. The increased debt load would translate into higher interest rates on new borrowing and refinancings further choking the economy. And in exchange for this monstrous new liability the nation would be in possession of nothing that produces future economic benefit. Certainly some number of Americans would be employed temporarily in manufacturing jobs, but when the artificial demand evaporated so would the jobs.

This is the economic crime being perpetuated against the American people by a political administration that does not understand how wealth is created, where jobs come from or why the economy continues to suffer despite make-believe GDP gains.

The legacy of steroid-induced GDP gains may be to accelerate the onslaught of debilitating inflation even as the real economic damage has yet to be halted or reversed.

House prices remain over-valued relative to the economic fundamentals which determine them. The economic damage of falling prices is magnified as leveraged equity evaporates. Much of the excessive debt burdening the housing industry results from Government policies which continue to encourage massive borrowing at subsidized interest rates . If there was any doubt as to whether house prices would gravitate towards a sustainable equilibrium, the ever-present and growing influence of unavoidable foreclosures makes falling prices inevitable. The economy will continue to weaken as leveraged equity is destroyed, consumption is eroded, bank capital is written-off and the will to borrow/lend for the purpose of purchasing a house fades with the return of the risk premium.

The last 18 months have been a case study in economic fraud. Were such a stunt to have been attempted within a banana republic such as Zimbabwe or Venezuela the scheme would have quickly collapsed, resulting in hyper-inflation, a hobbled currency and an eviscerated borrowing capability. It is only a function of America’s exceptional credit history and resilience that lenders have been willing to finance the unsustainable. It remains to be seen how much longer this arrangement will endure.

Government Foreclosure Mitigation Schemes Do Not Work - Update Courtesy of MSNBC

Whitney Ross — Tue, 26 Jan 2010 15:15:00 GMT

"Millions of Americans who are struggling to save their homes from foreclosure are trapped in a labyrinth of disappointment and misinformation created by the very institutions they’ve been told are trying to help them.

Ten months into the government’s third program in two years to stop a record wave of foreclosures, homeowners, housing counselors, consumer advocates and attorneys working with borrowers report that the latest effort is falling far short of its goal. In many cases, lenders are moving to foreclose even after homeowners get approved for loan modification, housing counselors and attorneys say.

The problem, they say, goes beyond the paperwork snafus and staffing shortages at lenders and mortgage servicers that have created massive bottlenecks for the millions at risk of losing their homes. Those have plagued the government’s foreclosure relief efforts since the first government-industry joint program, the Hope Now Alliance, was launched in October 2007."

Link to full MSNBC story:

Foreclosure Relief Program Riddled with Flaws

As Expected, Existing Home Sales Collapsed Following the Zenith of "Cash-For-Condos"

Whitney Ross — Mon, 25 Jan 2010 17:13:00 GMT

In December existing home sales declined by the largest amount (month-to-month) in 40 years. Based on media reports politicians, institutional economists and housing cheerleaders were apparently surprised by steepness of the collapse, but drew solace in year-over-year gains (I guess they were worried that housing sales would decline forever?).

Since the $8,000 tax credit for first-time homebuyers was implemented this blog has chronicled its distortive effect and what would inevitably happen once the program's impact faded.

Selected articles referencing "Cash-for-Condos":

The Most Interesting Housing Event Since Prices Began to Decline in 2006 (7/29/10)

A Practical Lesson in "Recoveries" Which Are Predicated Upon Subsidized Consumer Spending (10/5/10)

Housing Prices Continue to Plummet Despite Extraordinary Government Intervention (11/23/09)

Why Housing Prices Will Resume Collapse in 2010 (1/21/10)

When the Government stops paying people to buy cars, consumers cease purchasing autos in the same quantity. The same economic reality applies to houses. Should any naysayer seek to challenge this hypothesis there are several test cases looming which may serve to enlighten even the most economically challenged of politicians.

When the Federal Reserve stops buying Fannie/Freddie debt instruments in March mortgage rates will rise materially. During 2009 Fannie and Freddie financed approximately 75% of new mortgage debt and the Federal Reserve purchased 73% of these securities.
When mortage rates rise people will buy fewer homes as affordability decreases. Why purchase a home with a 6% mortgage in May when you were unwilling to do so at 5% in January?
When Stimulus Spending lapses later this year concocted GDP gains will evaporate and deficit-financed jobs will be lost.

All-in, the President's purported economic recovery has been a series of unsustainable and ill-advised Government distortions which will reverse themselves, leaving taxpayers saddled with unecessary new debt.

The recovery will only exist when the private sector is expanding sustainably, unemployment is improving unencumbered by stimulus and housing gains are organic; not driven by price and interest rate subsidies.

Ben Bernanke Cleary Established the Case Against His Own Renomination in 2005

Whitney Ross — Sat, 23 Jan 2010 22:55:00 GMT

The Senate is presently considering the confirmation of Ben Bernanke to a second term as the Chairman of the Federal Reserve. For most of the past five years the Fed Chair, through his own statements, has misunderstood the US economy and reacted to its steady decline incorrectly. Some very smart people give Bernanke credit for preventing a Depression via his decision to inflate the money supply and manipulate mortgage rates. It remains my contention that this decision, while presently perceived as beneficial, will also eventually be looked upon unfavorably when persistent inflation manifests itself.

Regardless of the eventual impact of “Helicopter Bernanke’s” monetary policy, the Fed Chair has given the Senate all the ammunition it needs to reject his confirmation. With his extensive experience, supposed academic expertise and the resources of the Federal Reserve at his disposal, Ben Bernanke succeeded in serially misinterpreting the US economy, failed to grasp the forces hobbling it and could not envision the inevitable collateral damage of those trends.

Below I include the transcript from and the link to a video interview of Ben Bernanke in July 2005. I submit that the content of his remarks are singularly sufficient to reject Mr. Bernanke as unqualified to serve as the Chairman of the Federal Reserve.

I have always been interested in the timing of these comments as they coincided with my initial public statements that the Housing Bubble would collapse and prices would fall by at least 30% nationally. I reached my conclusions based on an understanding of the economic forces which had propelled housing prices to unsustainable valuations over the previous decade. Home values had been propelled by the mandated availability of subprime mortgages, the ever-increasing use of leverage, momentum driven speculation and the proliferation of affordable mortgage products. Rapidly rising prices created leveraged equity gains which materially distorted consumption, savings and investment decisions.

While it is admittedly difficult to predict the timing of a confidence or credit bubble, all necessary information was available in 2005 to recognize that the Housing Bubble had exhausted its fuel supply and would collapse under its own weight. After 10 years of sky-rocketing homeownership rates, there were not enough buyers left to keep the Ponzi Scheme afloat. Leverage ratios could no longer expand as increasingly transactions involved negative equity. Valuations had risen to the point where speculators, using maximum leverage and affordable mortgage products, could no longer service the investments defaulting shortly after purchase. The specter of ARM resets, which required ever-increasing home prices and the ability of owners to monetize paper equity gains or refinance to stave of default, loomed menacingly. Inventories of newly constructed homes, which operate at the margin of the housing market, were beginning to accumulate.

An individual qualified to serve as Chairman of the Federal Reserve should have been able to grasp these economic concepts which many hedge funds, marginalized crackpots and Goldman Sachs understood to be reality. Ben Bernanke was and continues to be largely lost within an ongoing economic Depression which is partly of his own making.

This is a link to a compilation of Ben Bernanke video interviews and testimony which effectively demonstrates his lack of understanding and dismal qualifications.

The following transcript is an excerpt from a CNBC interview with Ben Bernanke in July 2005. It may be found 49 seconds into the attached video link above.

Moderator: "We have so many economists coming on our air that are saying this is a bubble, it’s going to burst, it’s going to be a real issue for the economy, some say it could even cause a recession at some point. What is the worst case scenario if in fact we were to see (housing) prices come down substantially across the country?"

Ben Bernanke: "Well I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize. Might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path though. I am hopeful that, confident in fact, that the bank regulators will play close attention to the kinds of loans that are being made, making sure that underwriting is done right. But I do think that this is mostly a localized problem and not something that is going to affect the national economy."

Why Housing Prices Will Resume Collapse in 2010

Whitney Ross — Fri, 22 Jan 2010 03:01:00 GMT

Home prices are falling again despite extraordinary Government intervention designed specifically to prop up values. Housing prices are destined to decline sharply during 2010 for a variety of reasons.

Mortgage Rates Will Rise Dramatically

The Federal Reserve has spent approximately $1.25 trillion buying open market, mortgage securities issued by Fannie Mae and Freddie Mac. The purpose of this unprecedented activity was to lower mortgage rates and in doing so, prop up home values. The Fed succeeded in lowering interest rates, but failed to stop eroding housing prices.

In March (or thereabouts) the Fed is scheduled to end its mortgage rate subsidy. During 2009 Fannie and Freddie financed approximately 75% of new mortgage debt. The Federal Reserve purchased 73% of all securities issued by Fannie and Freddie. Borrowing rates for home purchase are about to rise materially.

Credible analysts believe that rates will rise to at least 6%, representing a roughly 20% increase in the cost of servicing a 30-year mortgage. While record low borrowing costs were not sufficient to prop up home values, a material increase in ownership expenses will certainly force prices lower.

Buying Incentives to Fade

Many first-time home buyers were persuaded to purchase houses during 2009, enticed by the allure of an $8,000 tax credit. This Congressional effort to prop up prices succeeded in temporally increasing home sales, but has failed to stabilize home values. During 2010 the home buyer incentive will be reduced, then eliminated. Regardless, pent up demand amongst first-time homebuyers has already been largely exhausted.

First time home buyers will largely evaporate from the market when the tax credit vanishes. If remaining potential buyers are unwilling to purchase a home while being paid $8,000 to do so, why would they enter into such a transaction after the subsidy has expired? In the same way that car sales collapsed after Cash-for-Clunkers was exhausted, housing sales will decline forcing prices lower.

Record Foreclosures Will Occur

According to RealtyTrac 2.3 million homes entered foreclosure during 2008, 3.0 million during 2009 and an estimated 4.0 million will enter foreclosure during 2010. This growing number is driven by ARM resets, unemployment trends and the failure of Government mitigation efforts which delayed inevitable foreclosures.

The presence of a material number of foreclosures within the marketplace is disastrous for housing prices. Banks liquidate the unwanted homes at below existing values causing the market price to fall. Given the proper environment, this cycle becomes self-perpetuating as falling prices trigger more inventories of foreclosures. At present we have all the necessities for such a phenomenon as housing has never been more leveraged, unemployment is high and rising, homes remain overvalued relative to market fundamentals and credit continues to be restrained. This has been my thesis for housing since 2005 and four and a half years later I continue to see no means by which we escape real price declines prior to 2013.

During 2010 the housing market will experience record foreclosures. Those foreclosures will inevitably drive prices lower.

Supply and Demand

During the first half of 2009 monthly existing home sales averaged a run-rate of 4.5 million to 5.0 million transactions annually.

Homebuyer incentive programs increased that rate of transactions to in excess of 6.0 million a year. Given the waning influence of incentive programs, high unemployment and falling prices, it is unlikely that 2010 existing home sales will exceed 5.5 million.

This estimated rate of transactions is uncomfortably close to the 4.0 million estimated foreclosures which will occur during the year.

The percentage of existing home sales resulting from distressed transactions will remain high and increase during 2010. The higher the percentage of distressed sales, the greater the rate at which home prices will fall. There is a material risk that the supply of foreclosed properties may begin to overwhelm waning demand. At minimum this uncomfortable reality will force prices lower.

Changing Perceptions and the Return of the Risk Premium

I have preached against buying houses that are “on sale”, but overvalued and falling in price, since early 2006.

As transaction volumes began to decline, homebuilders operating at the margin began offering incentive programs to attract buyers. During the first half of 2006 buyers were enticed with free kitchen counter-tops and upgrades. By the Summer of 2006 purchasers were being compensated with free pools and eventually cars. Finally, the homebuilding industry began slashing prices and earlier “savvy” buyers found themselves increasingly underwater.

During 2007 foreign investors made equally “savvy” investments taking advantage of price discounts and a devalued dollar.

During 2008 distressed investors began to buy foreclosures enticed by large discounts relative to existing market prices.

During 2009 the Government lowered mortgage rates and paid new buyers to buy homes.

These people, who convinced themselves a house on sale must be a good value, have all been disciplined by the market. Each has seen the value of their purchase continue to decline and a large number are now underwater on their mortgages. Many of these buyers who made purchases after the housing collapse began will contribute to record foreclosures during 2010 and beyond.

Declining Demand for Foreclosures?

It is possible, as a result of sustained price declines, that the perception of “housing value” is beginning to change. There was recently performed a fascinating poll which bodes poorly for housing prices for years to come. The poll at present contains only two data points, and as such is not definitive, but it is intuitively appealing and centrally important.

The survey conducted by Harris Interactive determined that the percentage of Americans at least somewhat likely to consider buying a foreclosed home fell to 43% in November, down sharply from May's result of 55%.

It appears that four years of falling house prices and an eroding economy may have lessened interest in buying foreclosures. The implications of this trend are unsettling for house prices.

As established above there will be approximately 5.5 million existing homes purchased in 2010. An estimated 4 million foreclosures will occur during this period. Foreclosures will be the dominate force effecting the housing market and home prices in 2010 and beyond. If additionally the appeal of buying foreclosed properties begins to wane, as the supply rises, prices could fall at the most rapid pace we have seen since the Housing Bubble originally burst.

Dismal Reality

There was never a housing recovery during the Summer of 2009; only a moment where the confluence of extraordinary Government intervention combined with the annual “buying season” to temporarily halt the decline.

This blog exists partly because I was and continue to be certain that Government efforts to prop up housing prices will fail and extend the economic downturn.

House prices are again falling, but the worst may be yet to come. Rising interest rates, falling subsidies, increasing unemployment, record foreclosures, restrained credit, and shrinking interest in homeownership will accelerate housing price declines in 2010.

Today houses are cheaper than they have been since 2003. Yet, based on a thorough understanding of the fundamentals which determine housing prices, there may never have been a worse time to purchase a home.

A Year of Economic Hope and Change

Whitney Ross — Thu, 21 Jan 2010 00:01:00 GMT

A year ago today Barrack Obama was sworn into office as President of the United States. His response to the eroding economic climate was immediate and coordinated. It included an $800 billion Stimulus Spending Bill, foreclosure mitigation efforts, pressure on banks to increase lending, consumer protections from credit card companies, subsidies for new car purchases, incentives for first time homebuyers, record deficits and expanding Government.

It was year which began with hope but was ultimately defined by change.

The following job approval data is an average of 13 national polling sources including Gallup, Rasmussen, CBS and AP. The data includes dates from 1/27/09 through 1/20/2010.

It’s a Strange, Strange World (Scott Brown Election Commentary)

Whitney Ross — Tue, 19 Jan 2010 18:49:00 GMT

A year ago Barack Obama was elected President and the Democrats won a 60 seat super-majority in the Senate largely as the result of events having little to do with the political philosophy or legislative ambitions of the victorious candidates.

Candidate Obama

Don’t get me wrong, President Obama ran an extraordinarily effective campaign, is a charismatic figure, an exceptional orator and has a compelling story. He crafted an effective, non-specific set of campaign messages which resonated with a broad swath of the electorate. No one is against hope, and few resist the assumption of positive change.

Candidate Obama was further aided by a series of political events beyond his control:

George Bush was an unpopular President waging an unpopular war.
The Republicans had openly abused their power and defied their stated values of small government and limited spending
The media allowed Mr. Obama to campaign on undefined, generalized positions which appealed to a majority and could be beneficially interpreted individually by each voter
The media and the McCain campaign allowed Mr. Obama to define a more-centrist political philosophy than his voting record, historical statements and affiliations
McCain ran a wretchedly unorganized and uninspiring campaign

Predicting the Outcome of the 2008 Election Based on Economic Understanding

The 2008 election was an unusual outcome in that the United States generally does not elect known, aggressively liberal Democrats to the office of President. The only election which approaches this outcome in my estimation was the 1936 Presidential Election, which coincidentally also occurred during an economic Depression. (In 1932 FDR ran against the policies he later enacted. In 1940 WWII was the only real campaign issue and a change in leadership understandable unlikely)

It was my belief during 2007-2008 that the economic fall-out from collapsing housing prices would trigger public angst and a stock market crisis which would result in the election of a Democrat as President regardless of who the candidates were.

Based on my expectations for the impact of a deflating Housing Bubble, in August 2007 I wrote:

“Dow 10,000 by 2009. You heard it here first.”

Based on my predictions of falling housing prices, rising unemployment and the "real world" impact of a stock market correction, in January 2008 I wrote:

Economic “Armageddon is here and it’s mostly the Government's fault. Now the Democrats will get into office and the miserable social programs we have been saddled with since the last Great Depression will look tame after Hillary is done with us.”

At that time I had not heard of Barack Obama and Hillary Clinton seemed to be the presumptive Democratic candidate and our next President. But my expectations were fulfilled as the worst economic crisis since The Great Depression was responsible for a Democrat being elected and the pursuit of a New Deal-like agenda including Stimulus, Bail-Outs, Health Care, Cap and Trade, Card Check, Price Fixing, Minimum Wage and Regulatory Reform.

It is my stated understanding that The Great Depression was created by Government policies which exacerbated and perpetuated an economic crisis. It is my well-chronicled concern (and the reason this blog exists) that Government policies since late 2008 unnecessarily risk a long-lived economic Depression.

The Political Aftermath

While no individual American in November 2008 voted to bestow a 60 seat Senate majority upon the Democrats, the nationwide angst over the looming Depression resulted in that outcome.

The Democrats wrongly claimed a national mandate to fulfill their social ambitions believing they were elected based on campaign proposals rather than the result of an economic crisis. Exit polls support this contention as the majority of voters then and now define themselves as fiscally conservative and reject specific proposals such as health care reform.

It is ironical that the political party primarily responsible for gestating the Housing Bubble benefitted so astonishingly from its collapse. It is further fascinating that the political party which largely manufactured and perpetuated the current, unsustainable health care system has used its failure as an argument to take control of it entirely.

The Democrats have used their super-majority unapologetically, passing legislation on strictly partisan votes that in some cases have not even been read by members of Congress. The Stimulus Spending Bill being one such example.

Pursuing undesired social legislation and forcing these proposals through Congress has resulted in a backlash by the electorate. The President’s approval ratings have evidently fallen at the fastest pace on record, and recent polls and retirement announcements bode poorly for the Democrats in the coming election. It appears that the Senate Majority Leader will lose his Congressional seat in November. But the Democrats still enjoy a super-majority in the Senate and may pursue their unwanted social agenda unopposed… until today.

In what represents one of the more shocking political events in memory, a non-Democratic candidate has come out of nowhere to claim the Senate seat vacated by Ted Kennedy. This event may not be understated in terms of its political and economic importance. The seat had been held by Senator Kennedy for 46 years and was assumed to be the de facto 60th vote to pass partisan legislation in the Senate.

In what I am describing as a Political Miracle, the Democrats have been deprived of their ability to force through economically devastating public policy which would have the effect of permanently impairing job creation and real GDP growth, limiting an eventual recovery and risking an unnecessarily prolonged Depression.

Much damage has already been done, and I do not expect the Government to take the proper response to the downturn pre or post the November 2010 election. But it is possible that we may avoid the creation of new legacy burdens, similar to those imposed on the country during The Great Depression, which even today risk our nation’s solvency.

For the first time since October 2008 I feel hopeful that the Government’s contribution to intensifying economic damage may be limited.

It is a strange, strange world we live in where a President and Congressional super-majority may be elected primarily due to the arbitrary timing of an economic crisis. It is bizarre that the most ambitious and potentially damaging public policy initiative undertaken by that filibuster-proof majority may be derailed by the untimely passing of one of health care reform's greatest supporters. We live during interesting times.